How to Build Small Business Credit

Building business credit is an important part of growing a company as an independent professional. Even if you are bootstrapping your way through the early stages of your independent business—or have funds from investors to work with—at some point in the life of your business it will pay to have built up a positive business credit rating.

A good business credit score can enable you to more easily acquire financing, increase the value of your company, and protect your personal credit. Here’s what you need to know about business credit as an independent professional.

What is Small Business Credit?

You have a personal credit score, and your business has a credit score. Business credit is a track record of a business’s financial responsibility that companies, investors, or financial organizations use to determine whether or not that business is a good candidate to lend money to or do business with.

There are a number of agencies that calculate business credit, and each agency has a different calculation method, but typically this is a ranking from 0 to 100. The higher the number, the lower your calculated risk. Maintaining a score of 80 or higher is a good rule of thumb.

Common factors that impact your small business credit are public records, such as liens or bankruptcies, credit, such as outstanding balances and payment habits, and demographic information, such as business size and years on file.

How Business Credit Helps You Build Your Business

Strong business credit can help you grow your company. Many banks, investors, and companies rely on your business creditworthiness when setting loan terms, determining insurance premiums, increasing lines of credit, or considering you as a viable partner.

According to the Small Business Administration (SBA), insufficient or delayed financing is the second most common reason for business failure. Because anyone can view your business credit score—it’s not confidential—it’s important to establish business credit from the start receive better interest rates, loan terms, and negotiation leverage on payment periods with suppliers.

As a small business owner, separating personal credit and business credit is also important. Think of your small business credit as a wall dividing your business decisions from your personal credit history. Rather than being linked to your name and Social Security number, business credit is linked to your business entity and a separate Tax ID number.

This separation can remove potential funding obstacles that could prevent your business from growing. Likewise, it limits your personal liability while running a company—in the event your business went under, your personal credit would be protected.

How is Business Credit Calculated?

Major business credit bureaus include Dun & Bradstreet, Experian, and Equifax. Each agency uses slightly different indicators and methods to calculate a score.

• Dun & Bradstreet uses PAYDEX, a score ranging from 1 to 100 based on the payment history information Dun & Bradstreet has on file. The higher the score, the better your payment performance is.
• The Equifax business credit score compiles three different factors to determine the risk level of your business: a payment index, which is reflective of making on-time payments, a credit risk, which considers the likelihood of your business becoming severely delinquent, and a business failure score, the likelihood of your business closing.
• Experian uses Intelliscore Plus, a statistically based credit score with a 1 to 100 rage that takes multiple factors into account such as years in business, payment history, and new lines of credit opened.

Small businesses should also be aware of FICO’s Small Business Scoring Service (SBSS), which ranks businesses on the likelihood of making on-time payments. SBSS scores are used for term loans, lines of credit, and commercial loans up to $350,000 from the SBA. Scores range from 0 to 300, the higher the score the better. To pass the SBA’s pre-screen process, you need a minimum score of 140.

How Do I Build Small Business Credit?

If you’ve incorporated your business, applied for a loan, or leased office space, you likely have a business credit profile. You can look for your business through any one of the credit agencies where you can view summary reports for free or subscribe for full credit reports.

While full business credit reports aren’t free, checking your report about twice a year is recommended to look for errors or missing financial data. Reviewing your report can help protect your business against identity theft and can be useful to compare yourself with the borrower if you’re planning to apply for a loan. If you do see mistakes or missing information, you can report these errors with evidence about the inaccuracy.

Missed payments, a slow increase of debt, or collections on your business profile can trigger a low credit score. To maintain strong business credit, the best thing you can do is to pay your bills on time to build a positive payment history and monitor your file to ensure accuracy.

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The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs.  Before acting on any information in the MBO Blog, you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.